Shares in Rolls-Royce are flying high this morning after H1 results beat expectations (like-for-like organic revenue +14% to £7.04bn, above £6.55bn consensus). Trouble with Trent 1000 series engines that power Boeing’s Dreamliners continued to be a yoke around the engine maker’s neck, but with the cash costs of the resulting engine maintenance issues in-line with previous guidance, traders are happy to look to the future rather than dwell on the past.

In a welcome sign for investors, Rolls-Royce signalled confidence that FY underlying profit and free cash flow will be in the upper half of guidance range. It also sounded positive notes on the progress of its restructuring plan that will see 4.6K UK corporate and support job cuts save a net £400m annually by end-2020.

Revenue guidance for power systems (20% of underlying group revenues) has been upgraded from high single-digits to low double-digit growth. Furthermore, EBITDA margins in the more important defense sector are still seen lower, however now less so (margin seen -150bp vs -250bp previously). Both may not be enough to deliver an upgrade in guidance per se, but they are perhaps hinting at the potential for a mild beat, come FY results, even after all those engine woes.

Rolls Royce shares +3.5%. Accendo Markets does not have a rating or target price on Rolls-Royce.

Artjom Hatsaturjants, Research Analyst, 2 August 2018